Educational Articles

Using the Value Line Report: Cisco Systems Still King of Telecom Equipment

J. Susan Ferrara
| October 11, 2013

A star among telecom equipment companies, Dow component Cisco Systems (CSCO – Free Cisco Stock Report) is one of the most widely held stocks by investors. While the company has largely matured beyond its growth phase, it still has some momentum left and may even experience another growth spurt up ahead. The blue chip has a host of attractive features, which makes it appropriate for a well-balanced portfolio. We point those out in our discussion below.

Cisco Systems came into existence back in the 1980s, after two Stanford University staff members (husband-and-wife team Leonard Bosack and Sandy Lerner) enlisted the help of university engineers and researchers to turn their idea of transmitting data quickly and reliably through individual networks located in separate places into reality. Through a string of key acquisitions and management changes over the years, Cisco grew into the telecom equipment giant we have come to know today. As described in the Business Blurb section in the center of the Value Line report, Cisco is a leading provider of Internet Protocol-based networking and other products for transporting data, voice, and video across local-area networks, metropolitan-area networks, and wide-area networks. The company currently controls roughly 80% of the router market and more than two-thirds of the Ethernet switch segment, and it is seeking to widen its footprint in related subsegments of the switch market (i.e., storage, servers, virtualization software), where the increased need for bandwidth has led to greater demand for core routers. (For more on the company’s background, check out our Dow-30 Profile on Cisco.)

As a well-established, fairly mature player in the telecommunications equipment industry, one would imagine that there is little incentive to owning Cisco stock. While there is appeal here for those with a short-term investment horizon, the issue has other qualities that would make it an enticing portfolio addition. In fact, if we examine the Value Line page, a number of items jump out that suggest the equity has considerable investment merit, enough to pique the interest of a broad range of investors. To begin with, we take a look at the Ranks box (located at the top left-hand corner). Notice that CSCO sported a 2 (Above Average) rank for Timeliness when the report went to press in September. The rank had dropped a notch, due to a more tempered near-term outlook, reflecting weakness in certain foreign markets and inconsistent global conditions—notions discussed by analyst Kevin Downing in the Commentary.

But, at the time of this article’s writing, the rank climbed back up to 1 (Highest), indicating that the equity is pegged to outperform the broader market averages in the year ahead, thanks to strong price and earnings momentum of late. As illustrated in the Quarterly Earnings Per Share box, the telecom equipment behemoth has been successful at posting year-over-year increases in recent years, with a 9% gain registered in fiscal 2013.

The Statistical Array (in the center of the page) supports this fact, too. With the exception of a couple of years, where Net Profit declined, the company has performed well in the past decade or so. As shown in the Annual Rates box, revenue and earnings growth has ranged from 10% to 15% over the last 10 years, as business rebounded following a decline that was triggered by tighter client-based IT capital spending during the dot-com bubble. And, despite some moderation, advances are expected to be reasonably healthy through the 2016-2018 time frame.

Going back to the Ranks box, we see the issue boasts a top-notch Safety rank of 1, making it an excellent choice for those with a conservative bent. Safety is based on two underlying measures—Financial Strength and Stock Price Stability (both found in the Ratings box in the bottom right-hand corner). Cisco gets superior marks (A++) for the former, which accounts for a combination of key balance sheet items, including cash and debt levels. The latter metric is self-explanatory, and CSCO stock scores a solid 75 (out of 100) for that.

Cisco shares are also attractive on another level. At first glance of the Projections box, it would seem as if the issue doesn’t offer much in terms of long-term appreciation. But, in essence, total return potential, which factors in price-gains possibilities and dividend payments and prospective increases, is substantial on a risk-adjusted basis. Indeed, as analyst Kevin Downing explains in the final paragraph of the Commentary, Cisco’s increasing exposure to high-growth markets, including data centers, cloud computing, and streaming video, to name a few, should help the telecom equipment heavyweight hit top- and bottom-line performance targets in the not-too-distant future. Although the stock may not necessarily revisit historical highs reached back in the late 90s and in 2000, Cisco shares present, as the analyst puts it, “a compelling risk-reward scenario”. Conservative, income-and-growth individuals would be wise, therefore, to give the name some thought.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.